No government solution for this economic mess
August 11, 2011
A vocal segment of voters has been screaming for big government to get out of their lives. With this financial crisis, they might finally get their wish--and possibly live to regret it.
Wall Street plunged on Monday, and then behaved erratically on Tuesday. The catalyst for the latest panic may have been Standard & Poor's downgrade of the U.S. credit rating, but the underlying cause is the chronic weakness of the economy. This was demonstrated by the fact that investors fled stocks in favor of U.S. bonds on Monday. Clearly, the possibility of default is not as great a concern as pessimism about the economy.
Nervous investors didn't just turn to Treasury bonds. They also turned to the U.S. government for answers, only to find that the government's hands are tied on both fiscal and monetary policy:
- Fiscal policy. Addressing the deficit necessitated a certain degree of fiscal austerity, but the budget deal made that austerity more severe by attacking the problem entirely through spending cuts rather than a balance of spending cuts and tax reforms. Wealthy people may have saved a little in taxes, but they probably lost a lot more than that in Monday's market debacle. In any case, it doesn't look like any new spending initiatives are possible.
- Monetary policy. The Federal Reserve somewhat meekly announced yesterday that it would keep low interest rates in place till at least mid-2013. "More of the same" isn't exactly the dramatic rescue investors wanted to hear about, but it's probably all the Fed has left. After all, interest rates have already been low, and it hasn't helped. Indeed, as MoneyRates.com has detailed previously, keeping rates on CDs, savings accounts, and money market accounts unnaturally low might actually have kept some money out of the economy.
The news isn't all bad. Consumer debt burdens are more manageable than they've been since the mid-1990s, corporations have healthy hoards of cash and fast growth in developing economies could provide new export opportunities. Wherever the solution comes from, though, it doesn't look like the government will play a leading role this time around.
